Public pensions stay private: Column

May 2, 2013
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New York State Comptroller Thomas DiNapoli / Mike Groll, AP

by Brett Joshpe, USA TODAY

by Brett Joshpe, USA TODAY

This year, New York Comptroller Thomas DiNapoli, who is responsible for the state's $150 billion public pension, sued Qualcomm, seeking the wireless technology company's political spending records. The suit revealed a little known hypocrisy. Many public pension systems are willing to take on corporate boards as activist investors and push for sound governance, pay-for-performance standards and transparency. But when it comes to their own investing, public pension systems will go to great lengths to avoid public oversight.

Those pension funds are among the largest investors in the private equity industry, the network of large investment funds most known for their participation in corporate buyouts. Bain Capital, made famous by its association with Mitt Romney, is an example. As a result, taxpayer contributions have helped fuel the buyout boom.

Private gain

Not only can such investments have large consequences for jobs and the economy, but the relationship between pensions and investment funds also can create tremendous opportunity for corruption and conflicts of interest. In March, the former CEO of CalPERS, California's largest pension fund, was indicted for allegedly steering pension money into funds that a former pension board member was paid millions of dollars to promote.

The lack of transparency also facilitates questionable practices designed to dramatically lower federal and state tax bills for leaders of private equity firms. One example is the "waiver of management fees," an aggressive tax maneuver that many experts say is illegal and attempts to convert ordinary income into lower-taxed capital gains.

All three issues could be curbed by the dose of sunshine that public pension funds are demanding for large corporations. Even some private equity insiders understand this. When former private equity executive Romney was governor of Massachusetts, he vetoed legislation that would have enacted further obstacles to public disclosure, saying, "Given our history in Massachusetts of abuse and potential self-dealing, we're very concerned about confidentiality provisions as they relate to investments of billions of dollars of public pension funds."

With billions of dollars in public obligations depending on the performance of private portfolio managers, the public should be entitled to transparency. For public pensions that profess to value that transparency and accountability elsewhere, it is time to tear down their own selective wall of secrecy.

Brett Joshpe, an attorney and author in New York City, is principal of Joshpe Law Group.

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